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Hello Mr. John,
i have this confusion regarding tax allowable depreciation. when computing the value of a company using free cash flow method, usually the question provides a PBIT which has been arrived after deducting tax allowable depreciation. should’nt we calculate the tax on this amount and then add back the depreciation? in some questions they add back. in some questions they dont. kindly clear the concept.
Thanks in advance
The depreciation should be added back.
However, many questions state that the amount of investment needed to maintain the the non-current assets is equal to the depreciation. (Even when it isn’t stated, the examiner often makes that assumption in his answer)
In that case, although the depreciation itself should be added back, we should also have an outflow of the same amount (the investment in assets) and so the net effect is zero.
Alright, so when an assumption of that sort is mentioned, we dont need to add back.
Thank you so much Mr. John 🙂
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